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BREAKFAST DEALS: Media misfire

The ACCC sets new media sector rules by rejecting Stokes CMH play, and Nine can't convince its senior lenders to come to an agreement.

The consumer watchdog has set some new groundrules for the Australian media sector by telling Seven Group billionaire Kerry Stokes he can’t have Consolidated Media Holdings. Meanwhile, rival Nine Entertainment doesn’t appear to have persuaded its senior lenders with its new ownership plan. The ACCC also popped up to tell Sonic Healthcare they can’t have Healthscope’s Queensland pathology business, while a host of parties have weighed in on the watchdog’s investigation into the Qantas-Emirates alliance. Finally, Discovery Metals has knocked back its suitors, was it a good idea?

After spending a decade trying to get a proper foothold in the pay TV business, Seven Group Holdings billionaire Kerry Stokes called time on that endeavour with the briefest of statements from the ASX.

"Seven Group Holdings Limited acknowledges the ACCC’s decision announced today in relation to Consolidated Media Holdings Limited and intends to vote in favour of the scheme resolution to give effect to the News Limited proposal, as recommended by the directors of CMH,” said the Stokes vehicle.

And with that, News Limited, the owner of this website, forks out $1.94 billion for CMH, of which around $1 billion will go to billionaire James Packer’s Consolidated Media Holdings and another $500 million will go to Stokes.

Packer is likely to direct that firepower at Echo Entertainment in some way. It’ll be interesting to see if he sets some aside to creep to majority ownership of Crown Limited.

As Business Spectator’s Cliona O’Dowd points out, the conservative thing for Stokes to do would be to pay down some debt. But there are some cheap media assets out there, including Seven West Media, and Stokes is "known as a punter”.

Foxtel becomes a 50-50 company between News and Telstra Corporation, while the former wholly owns Fox Sports Australia outright.

While all this was predictable and, in the style of the Seven statement, brief, the implications of it are anything but.

The Australian Competition and Consumer Commission made it plain in its statement that it doesn’t like the idea of a free-to-air TV company stepping into the pay-TV domain – the impact on sports broadcasting was the primary concern.

This rules out News from doing a deal with any of the free-to-air companies, which means the speculation about a potential deal with Ten Network should stop as of yesterday.

It also means that Telstra is in the same position. In fact, ACCC chairman Rod Sims has told The Australian Financial Review that the watchdog is "not comfortable” with Telstra holding a 50 per cent stake in Foxtel to begin with. A bid for Nine Entertainment, once reported as something Telstra might consider, was never an option.

The question for News is whether there are any significant media assets in Australia left over that wouldn’t throw up serious concerns at the ACCC.

You can count out the TV networks and the Fairfax newspapers. But a move into radio would mean the company traversed three traditional media platforms – newspapers, television and radio – while having its own online presence. That might also cause some issues.

It’s been observed in some quarters that News was lucky enough to be bidding for CMH at a time when its other logical rivals Nine Entertainment and Ten Network were weakened by debt issues and low ratings, respectively.

In hindsight, the ACCC was always destined to make sure that if CMH was going to end up in the hands of another media company, it wasn’t going to be any of the free-to-air networks, or Telstra for that matter. Fairfax doesn’t have the firepower at the moment, which leaves News.

While we’re talking about television, all signs point to Nine Entertainment’s senior lenders rejecting the proposal put by network chairman Peter Bush and chief executive David Gyngell on Tuesday.

While mezzanine lender Goldman Sachs backed right off its call for a 30 per cent stake to something in the single digits, media reports indicate that US hedge funds Apollo Global Management and Oaktree Capital are expected to reject the new deal.

The Australian reports that the hedge funds will put a counter-proposal forward that’s even less generous to Goldman, although Fairfax reports that the investment bank isn’t prepared to negotiate any further.

‘We’ll be back right after these less lucrative commercials.’

Sonic Healthcare, Healthscope

The consumer watchdog certainly had a big day yesterday.

Aside from the Consolidated Media Holdings decision, the Australian Competition and Consumer Commission (ACCC) blocked the proposal by Sonic Healthcare to acquire the Queensland pathology business of rival Healthscope.

"The proposed acquisition in Queensland would result in the removal of a substantial competitive constraint on the two major pathology providers in that state. Whilst Sonic and Primary are the clear market leaders in Queensland, Healthscope is an important competitor in that market,” ACCC chairman Rod Sims said in a statement.

The ACCC wasn’t concerned about the acquisition of Healthscope’s footprint in Western Australia for $18 million.

Sonic was originally thinking of a deal in the order of $100 million, but dropped Healthscope’s arms in NSW and the ACT in the hope of winning over the consumer watchdog on Queensland.

According to The Australian, Sonic will think about restructuring the proposal in the hope of satisfying the ACCC’s worries.

Qantas Airways, Emirates, Virgin Australia

Virgin Australia isn’t giving up in its quest to prevent rival Qantas Airways from forming an alliance with Middle Eastern carrier Emirates.

The lower-cost airline made a submission to the Australian Competition and Consumer Commission (ACCC), which is considering the 10-year proposal, urging the regulator to block it.

Virgin argues that the terms of the alliance are too broad and that as a result, competition will suffer.

The carrier said there’s a contraction between the statements Qantas has made about its declining competitiveness in international markets overseas, and it’s claim that flights to London via Dubai will now be done "irrespective of whether its partnership with Emirates is approved”.

The inference is that if Europe is such a money-loser for Qantas, why did they move operations to Dubai where it will run up against an Emirate that might not turn out to be its partner.

The tone of the conversation about Qantas-Emirates has shifted towards the flying kangaroo this week.

The Department of Infrastructure and Transport made its own submission to the ACCC, which sits in stark contrast to the Virgin submission.

"On this basis, the department considers the proposed agreement will enhance consumer choice, deepen competition in a number of markets and, like recent Virgin Australia partnerships, broaden Qantas’ international network at minimum capital cost,” said the department.

Transport Minister Martin Ferguson followed up by publicly encouraging the consumer watchdog to waive the deal through.

British Airways is the alliance partner that Qantas is leaving behind and, as a result, the company told the ACCC that it’s increasingly unlikely to continue serving the kangaroo route.

Discovery Metals, Cathay Fortune and the China-Africa Development Fund

Australia’s Discovery Metals has turned down a non-binding $830 million offer from major shareholder Cathay Fortune and the China-Africa Development Fund.

The offer at $1.70 is a massive premium to the levels that Discovery was trading at in early September, but over the last six months the stock has consistently traded around and above $1.40 a share.

The bidders were perhaps being a little opportunistic and after consulting with its advisers at UBS, Discovery decided not even to engage the pair for negotiations.

Discovery said in a statement that it'd consider a new proposal if it was forthcoming.

Until then, Cathay Fortune is going to have to be content with its 13 per cent.

Australia’s M&A Scoreboard

The data pool on how subdued Australia’s mergers and acquisitions industry is at the moment has deepened with the latest numbers from mergermarket.

Its figures indicate that the first nine months of 2012, inbound deals declined 67.2 per cent to $22.4 billion, while outbound deals dropped 31.6 per cent to $7.7 billion.

Like the Dealogic numbers from two weeks ago, Macquarie Group topped the league table for financial advisers on value and volume. Freehills took out the top spot for legal advice.

As expected, the resources sector did most of the talking. Half the value of incoming deals was accounted for by energy, mining and utilities.

Wrapping up

Poultry company Ingham Enterprises is set to have a stack of indicative proposals by Monday.

The Australian Financial Review reports that Affinity Equity Partners is firming as favourite, while private equity firms Kohlberg Kravis Roberts and Pacific Equity Partners mightn’t be so keen.

The problem facing Affinity it also holds more than 40 per cent of the New Zealand chicken market with Tegel Foods, which it picked up from PEP in 2010.

Ingham is also a big player in the NZ market and it’s almost likely that if Affinity were to win, it would have to divest something.

And also in New Zealand, Deutsche Bank believes that China’s Haier could come back with a higher offer for Fisher & Paykel if the company can hold them off at $NZ1.20 a share.

Haier already has 20 per cent of the company with another 17.5 per cent sewn up through an agreement with Allan Gray Australia in the absence of a better offer.

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